Client yearning to fire attorney Lerach says Fortune story was last straw

In papers filed last night, a class action plaintiff says that after discreetly and unsuccessfully trying to fire attorney Bill Lerach and his law firm for five months, it was finally prompted to take court action by a Fortune cover story about Lerach's former law firm, Milberg Weiss Bershad Hynes & Lerach.

That's when the "situation became intolerable," according to a brief filed in federal court in Dallas by an attorney for the Archdiocese of Milwaukee Supporting Fund, the lead plaintiff in high-profile shareholder litigation that has been pending against Halliburton (HAL) since 2002.

Lerach and his West Coast office of Milberg Weiss split away from that firm in 2004; the remainder of Milberg Weiss was indicted this past May, along with two of its name partners. Lerach reportedly is still a target of the ongoing investigation. The Fortune cover story, written by editor-at-large Peter Elkind and published on October 30 (cover dated November 13), is available here.

"Due to the strong manner, tone and factual information stated in Elkind's article, I feel that I am left with no choice but to direct you to remove Lerach and his firm from the Halliburton case," wrote Paula John, the executive vice president and general counsel of the AMS Fund in a November letter to an attorney at Scott + Scott, the firm then acting as the fund's co-counsel along with Lerach Coughlin Stoia Geller Rudman & Robbins. On November 22, after attorneys at Scott + Scott refused to help the fund boot Lerach Coughlin, the AMS Fund formally moved to have both Scott + Scott and Lerach Coughlin replaced by Boies Schiller & Flexner, the firm founded by superlawyer David Boies.

The Fund says it is seeking Lerach Coughlin's removal because it is concerned about the substance of the allegations of the indictment, which "includes specific allegations against Lerach that go to the heart of a lead counsel's duties to absent class members and the court"; about the likelihood of additional media coverage and additional factual revelations; about the ability of Lerach to adequately perform his duties as class counsel as the criminal probe continues; and "the revelation that the DOJ was concurrently investigating both Halliburton and Lerach."

In yesterday's filing, the AMS Fund says its principals had been "stunned" by Milberg Weiss's indictment in May. They allege that Lerach never disclosed to them either that federal prosecutors were investigating his former firm or "that Lerach was one of their primary targets." The May indictment alleges that Milberg Weiss paid three plaintiffs $11.4 million in secret kickbacks in more than 150 cases over almost a quarter century, and that its lawyers repeatedly lied about those arrangements in court. (In essence, the firm is accused of having paid the plaintiffs to pretend that they were exercising independent judgment on the class's behalf, when in fact Milberg Weiss was pulling all the strings. That backdrop is, at the very least, ironic in the context of the current power struggle, in which Lerach Coughlin appears to be trying to wrench control of the suit away from an all-too-genuine plaintiff, the AMS Fund.)

The Fund also cites as a factor in its decision to seek Lerach Coughlin's ouster an interview Lerach gave in the July 10 issue of The Nation , in which, the Fund's lawyer argues, Lerach personal agenda appeared to be taking precedence over the interests of the class. In the article (link to it here), William Greider wrote that Lerach had "reformulated the Halliburton complaint to pointedly portray [former Halliburton CEO, now Vice President Dick] Cheney and 'Cheney's team' as the wrongdoers who fabricated and deceived," and that Cheney, though not named as a defendant, faced "grilling under oath by Lerach." Greider also speculated that "a high-profile case against the Veep could help protect [Lerach] against retribution by Congress" in the form of more class-action reform legislation.

In addition, the AMS Fund brief alleges that when confronted with the plaintiff's determination to remove Lerach, both Scott + Scott and Lerach Coughlin "began a campaign to intimidate" it into changing its mind by "impugning its efforts to protect the class." It also contends that those firms implied in a letter that they might get a particularly favorable hearing from presiding U.S. District Judge Barbara Lynn, since they had retained two retired federal judges, one of whom (Lawrence Irving) "worked with Judge Lynn earlier in this case" and the other of whom (Joe Kendall) "knows Judge Lynn and the Dallas federal courthouse quite well," according to excerpts from the letter quoted in the briefs.

In a final turn of the screw, the Fund's motion also appears to denigrate the independence of the three pension funds Lerach Coughlin now wishes to elevate to lead plaintiff status (to replace the AMS Fund), by alleging that that they have served as plaintiffs for either Milberg Weiss or Lerach Coughlin in more than 50 cases over the past five years.

The AMS Fund is represented on the motion by Dallas attorney E. Lawrence Vincent and, it also receiving assistance from Neil Rothstein, a former partner at Scott + Scott who left the firm in March. (Prior to 1993, Rothstein also worked directly with Bill Lerach at the then unified firm of Milberg Weiss.) Boies Schiller & Flexner is not yet involved in the case--at least formally--though a BSF attorney has acknowledged in an affidavit that it is ready, willing, and able to step in.

Though at least two federal judges have prevented Milberg Weiss from serving as class counsel because of its indictment, none has yet disqualified the Lerach Coughlin firm on those grounds, and that firm probably remains the dominant class action firm in the country today. Its recoveries for securities holders in the Enron securities litigation--more than $7 billion so far--are the largest ever obtained.

For more details about the Halliburton dispute, see my earlier posting on the subject here, or a still earlier Forbes article here.

Lerach Coughlin's and Scott + Scott's response papers to the motion to remove them, filed December 12, stressed that removal of the firms at this stage of the litigation would cause needless expense and delay, and also alleged that the Boies firm had a conflict of interest. The alleged conflict involved the Boies firm's current defense of Tyco in shareholder litigation; two of the pension funds Lerach represents in the Halliburton case are also class members in the suit against Tyco International (TYC).

(Disclosure: Lerach takes the position that any article I or Fortune write about his firm is retaliation for shareholder litigation Lerach is currently bringing against AOL Time Warner, the former name of Fortune's parent company, on behalf of about 70 institutional clients, seeking about $3.5 billion.)

Last week an advocacy group that champions the use of free and open source software, including the Linux operating system, asked the U.S. Supreme Court to invalidate all software patents.

The request was made by the Software Freedom Law Center in an amicus brief submitted in the case known as Microsoft v. AT&T, which is scheduled for argument Feb. 21. It is unlikely that the Court would take the advocacy group up on its invitation, if for no other reason than the Court has only asked the parties to brief narrower questions presented by the case, which focuses on the degree to which a U.S. software patent can be enforced abroad. Still, the center, which aims to provide legal peace of mind to developers and users of open-source software, is putting the lightening-rod issue on the Court's radar screen and hoping the Court will craft its ruling in a way that tees up the broader issue for future resolution.

One of the greatest threats to the acceptance of open source software by major corporate customers is the so-called FUD factor--the "fear, uncertainty, and doubt" that arises (justifiably or not) from the concern that patented proprietary software code might have found its way into the open source software at some stage, exposing the customer to liability for patent infringement. Because open source software is created through a decentralized process, with hundreds of individual developers making contributions, it is hard to guarantee against such an occurrence. If the SFLC could ever succeed in having the Supreme Court invalidate all software patents in one fell swoop, its mission would largely be complete.

The goal is not as pie-in-the-sky as it might sound. For many years the consensus assumption in the legal community was, indeed, that software, because it is just a set of instructions readable by a compatible machine, could not be patented without impermissibly carving out of the public domain fundamental laws of nature, abstract ideas, or mathematical algorithms, which the Supreme Court has previously declared to be off limits to patenting. That view was gradually reversed by a series of rulings in the 1990s by the U.S. Court of Appeals for the Federal Circuit, a special appellate court set up in the 1980s to handle patent cases, among others. But Daniel Ravicher, the legal director of the Software Freedom Law Center, argues in the group's brief that these Federal Circuit rulings are inconsistent with the earlier U.S. Supreme Court precedents in the area. He asks that they at long last be examined by the the High Court--and overruled.

The SFLC seeks to ride a legal wave of sorts. The Supreme Court now appears to be cutting back on years of expansive rulings by the Federal Circuit, which many perceive as having inappropriately maximized the rights of patent-holders vis-a-vis accused infringers. Last term, in the eBay v. MercExchange case, the Court struck down one such pro-patent-holder rule that the Federal Circuit had devised, and this term, in the recently argued KSR International v. Teleflex case, the Court is widely expected to pare back another. (For an earlier Legalpad entry on the KSR case, click here.)

The Microsoft v. AT&T dispute concerns a law that was passed in 1984 to plug a loophole that originally had nothing to do with software. The law focused on banning the practice whereby some U.S. manufacturers were effectively doing end runs around other people's U.S. patents by manufacturing the components of infringing inventions here in the U.S., but then shipping the components overseas for final assembly. The statute deemed such conduct to be infringing, so long as any "component" of the invention was being "supplied" from the U.S.

In this case, Microsoft (MSFT) has admitted that certain software in its Windows operating system violates an AT&T (T) patent relating to the digital coding and decoding of human speech. Though Microsoft concedes it must pay royalties for copies of Windows sold in this country, the question is whether it must also pay AT&T for copies of Windows that are installed on computers that are manufactured and sold abroad. In those situations, Microsoft loads a copy of Windows onto a "golden master disk," and sends that abroad. There, licensed "replicators" make a first-generation copy of Windows from the golden master disk. Then that first-generation copy is "installed" onto foreign manufactured computers--i.e., it is copied again. So, argues Microsoft, it's not infringing AT&T's U.S. patent for two reasons: (1) no molecule of anything that winds up in overseas computers is being "supplied" from the United States; and (2) software is not a "component" of a patented invention within the meaning of the 1984 law. Ravicher hopes to import his contentions onto the second prong of Microsoft's argument. He would like the Court to say: Right, software can't be a "component" of a patented invention because it's not patent-eligible to begin with.

The amicus briefs from the various groups who support either prong of Microsoft's position were filed on December 15. The most influential brief among them is clearly that of the United States (which represents the views of both the U.S. Patent and Trademark Office and the Justice Department), but the Business Software Alliance, the Software and Information Industry Association, Intel (INTC), Amazon (AMZN), Yahoo! (YHOO), and Autodesk (ADSK) have all weighed in on Microsoft's side as well. Amicus briefs on AT&T's side have not yet reached the deadline for filing, so we do not yet know who they will include. The best in-depth discussion (with links) I have seen of the Microsoft v. AT&T case is at the Patently-O blog, where the specific discussion is here.

An Australian federal appeals court ruling handed down on Monday, imposing copyright liability on the owners of a defunct Web site called www.mp3s4free.com, has the international blogging world in an uproar.

At one level, the ruling (for which, click here) seems to tread familiar ground. Much as the U.S. courts did in their rulings relating to the original, pre-legal Napster and Grokster peer-to-peer file-sharing services, the Australian judges found the Web site owners to be "secondarily" liable for copyright infringement that they were facilitating, even though the site owners themselves neither possessed any protected files nor engaged in any direct copying of them.

Critics of the ruling, however, claim it goes further, alleging that it suggests that mere linking to sites that offer copyrighted files for download can result in copyright liability--a ruling that would theoretically imperil even general-purpose search engines, like Google. The most provocative line in the ruling comes in paragraph 40 of the majority opinion of Justice Catherine Branson, where she dismisses the contention of the Web site operator, Stephen Cooper, that his site does no more than Google does: "Mr. Cooper's assumption that Google's activities in Australia do not result in infringements of the [Australian Copyright] Act is untested." (As they say in chess books, "!?!") In fairness to Justice Branson, she goes on to offer an important second basis for dismissing the Google comparison: "Google is a general purpose search engine rather than a website designed to facilitate the download of music files. The suggested analogy is unhelpful in the context of Mr. Cooper's appeal."

The most comprehensive discussion of the case, with links to international commentary (both learned and profane), seems to be at Weatherall's Law, a blog maintained by Kimberlee Weatherall, a senior lecturer in law at Melbourne University.

Cooper's site provided links to mp3 files of popular songs. If I'm understanding the Court's description correctly, a single click on the link would not only take the music fan to someone else's site or server, which made that song available, but commenced an instant download of it. You can see what the former site looked like by typing www.mp3s4free.com into the Internet Archive's Wayback Machine, provided here.

The Australian law governing "secondary" copyright liability is slightly different from U.S. law. While the American courts focus on such concepts as "contributory infringement," "vicarious infringement," and "inducing infringement," the Australian courts examine the notion of "authorization of infringement"--or, if we go whole hog, "authorisation of infringement." For those who want to take a stab at understanding the distinctions between these concepts, here's an article on the subject by law professors Jane Ginsburg of Columbia and Sam Ricketson of the University of Melbourne.

Incidentally, the Cooper ruling has deluged professor Weatherall's site with traffic from people previously unfamiliar with it. Many of the inquiries have prompted the professor to wonder with some chagrin, "Why does everyone assume I'm a bloke?" She's not. You may see her photograph by clicking here.

I'm afraid I really don't see why this ruling is any different at all from the Napster rulings of nearly six years ago. Can any commentator explain it to me?

On Tuesday night, Bill Lerach's firm, Lerach Coughlin Stoia Geller Rudman & Robbins, filed papers indicating that it will vigorously fight the lead plaintiff's request that it withdraw as lead counsel in a high-profile class action against Halliburton (HAL).

The lead plaintiff, a charitable foundation known as the Archdiocese of Milwaukee Supporting Fund (AMS Fund), made the request in Dallas federal court on November 22, stating only that its relationship with both Lerach Coughlin and co-lead counsel Scott + Scott "had deteriorated," and asking that David Boies of Boies Schiller & Flexner be substituted as the new lead counsel.

In an interview, however, an outside attorney for the AMS Fund, Neil Rothstein, says that the ongoing criminal investigation of Bill Lerach and the publicity surrounding that investigation played a role in the fund's decision to seek Lerach's ouster. Until 2004, Lerach was a name partner at the firm then known as Milberg Weiss Bershad Hynes & Lerach. The successor firm, Milberg Weiss Bershad & Schulman, was indicted in May 2006, along with two its name partners, David Bershad and Steven Schulman. (The AMS Fund request to substitute the Boies firm for Lerach's came about three weeks after my colleague, Peter Elkind, wrote a cover story in Fortune about the circumstances surrounding the indictment, which you can read here.)

Since the indictment, rival class action firms have made a handful of challenges to allowing the indicted Milberg Weiss firm to serve as lead counsel--with mixed results--but, thus far, there have been no sustained attempts to hold the indictment against the Lerach Coughlin firm. One group of plaintiffs did mount an attack upon Lerach Coughlin last June in Philadelphia federal court, requesting that the firm be rejected as lead counsel in a consolidation of shareholder suits against GMH Communities Trust. But the group mysteriously withdrew its motion without explanation just three days later. The abandoned motion, filed by class action powerhouse Cohen Milstein Hausfeld & Toll, had cited the indictment's repeated references to a "Partner B," widely reported to be Lerach, and argued that the accusations went "to the very core of a class counsel's duties to the class and the court." (The indictment accuses Milberg Weiss of secretly paying three individuals to serve as its plaintiffs in more than 150 class actions over more than two decades, and lying about that fact in numerous court filings.)

This time, it looks like battle may be fully joined. The papers the Lerach firm filed yesterday argue forcefully that substituting lead counsel at this advanced stage in the case will cause "delay, duplication of effort, and extra fees and expense." It also says that three pension fund class representatives (though not currently designated as the lead plaintiff) want Lerach Coughlin to remain as lead counsel, and it alleges that the proposed substitute firm, Boies Schiller, has a conflict of interest.

The contentions can only be understood against the backdrop of the case's unusual procedural history. In 2002 a series of shareholder actions were filed against Halliburton, alleging improper accounting on company financial statements during the period when Halliburton's CEO was Dick Cheney, now the vice president of the United States. The law firms representing three of the four original lead plaintiffs then proposed a quick settlement with Halliburton for just $6 million. The AMS Fund was the sole dissenter, contending that the settlement was far too cheap; in addition, it wanted to add charges arising from Halliburton's vast underestimation of its asbestos liability. In September 2004, Judge Barbara Lynn ruled for the AMS Fund and rejected the settlement. At that time, the AMS Fund was represented by Scott + Scott, where Neil Rothstein was then a partner. Rothstein and Paula John, an AMS Fund executive vice president (and attorney) went to law school together 22 years ago, according to Rothstein. John's mother is president of the AMS Fund.

In January 2005, three pension funds, represented by Lerach Coughlin, moved to intervene in the case. The AMS Fund welcomed Lerach Coughlin's assistance, and Judge Lynn appointed it co-lead counsel. The AMS Fund remained the sole "lead" plaintiff, but the three pension funds became additional class representatives.

Then in November 2005 Rothstein--who had always been the AMS Fund's chief contact at Scott + Scott--took a leave of absence from that firm. In March 2006 he severed his ties completely, and founded a corporation called Truth in Corporate Justice, which, he says, "provides litigation ethics oversight." At Paula John's request, Rothstein remained "special counsel to the AMS Fund."

In November 2006, Rothstein and a Dallas attorney retained by John filed the AMS Fund's motion seeking to substitute Boies Schiller as lead counsel for both Lerach Coughlin and Scott + Scott.

In Lerach Coughlin and Scott + Scott's response papers filed last night, the firms contend that the Boies Schiller firm has a conflict, in that it is currently defending Tyco in shareholder litigation in which one of the lead plaintiffs is the Plumbers and Pipefitters National Pension Fund. That fund is one of the three that Lerach Coughlin brought into the Halliburton case in January 2005. In addition, the City of Dearborn Heights (Michigan) Police and Fire Retirement System fund, another class representative Lerach Coughlin brought into the Halliburton case, is a class member in the Tyco litigation.

[See CORRECTION below.] On the other hand, Lerach Coughlin's three pension fund clients--the third is the Laborers National Pension Fund--may raise some issues for Lerach Coughlin. On June 22, the Chicago Tribune reported that William K. Cavanagh, a legal adviser to several Illinois pension funds that have served as plaintiffs for both Lerach Coughlin and Milberg Weiss, had received $750,000 in fees from those firms which had allegedly not been disclosed to the judges overseeing the cases, and for which Cavanagh had no corroborating records. Cavanagh told the Tribune that he hadn't keep track of hours because he knew he'd be paid on a contingency. A Lerach Coughlin attorney was also quoted stating that "Their conduct here was not only consistent with law, but with longstanding contingent fee practice throughout the United States." He also accused the Tribune of writing the article in retaliation because Lerach Coughlin was suing its parent, the Tribune Company in shareholder litigation. (Similarly, Bill Lerach told me in an interview, "Make sure you put in that your parent company [i.e., Time Warner] is being sued by us for $3.5 billion.")

In any event, one of the three pension funds Lerach brought into the Halliburton case may be related to one of the Cavanagh funds. While Lerach brought the Plumbers and Pipefitters National into the Halliburton case, the Plumbers and Pipefitters Local 137 was one of the Cavanagh funds discussed in the Tribune article. The AMS Fund can be expected to explore this subject.

Do readers have any predictions or suggestions as to how Judge Lynn will or should resolve this dispute?

CORRECTION as of 12-17-06: I have rewritten and deleted portions of the last three paragraphs of this article. Originally, I confused the National Laborers Pension Fund with the Central Laborers Pension Fund, which is a second Cavanagh-related Fund discussed in the Tribune article.

Supremely influential and frequently controversial, federal appeals court judge Richard Posner has now also become metaversial. Last Thursday evening, Judge Posner left Chicago to spend a couple hours in Second Life, the metaverse simulated by servers operated by Linden Lab.

At a Greek-style amphitheater surrounded by a moat in the neighborhood of "Kula," Posner's in-world character (or avatar) spoke and answered questions about Posner's new book, Not A Suicide Pact: The Constitution in a Time of National Emergency. Although visitors to Second Life more typically choose for themselves fancifully named and shaped avatars that resemble animals, monsters, or sexually exotic humans, Judge Posner's avatar was named "Judge Richard Posner" and took the form of a realistically balding and bespectacled older gentleman dressed in a gray suit and rep tie. In a brief e-mail to me, Posner says he thought he "looked kind of weird."

The forum had "something to do with Creative Commons," Posner explains, "whose leader, [Stanford law professor and cyberlaw authority] Larry Lessig is a friend and former law clerk, and it was he who arranged for the invitation to me."

Posner says that he was asked some questions about "intellectual property in cyberspace, such as whether duplicating in [Second Life] a building [that exists] in the real world might infringe the copyright of the building owner." (For a learned debate about that question in the Patry Copyright Blog, click here.) But Posner chose not to weigh in on that "very difficult" issue, he says. That seems prudent to me, since it's a question that might eventually come before him on the bench in some universe or other.

Second Life blogger Wagner James Au promises to post a transcript of Judge Posner's appearance in Second Life on his New World Notes site on Monday (December 11).

Incidentally, Posner, 67, is probably the most prolific writer the federal judiciary has ever known. He has published more than 45 books, more than 300 scholarly articles and book reviews, and more than 2,200 court opinions. Since December 2004 he has also co-written The Becker-Posner Blog with Gary Becker, an economics professor at the University of Chicago. To see a short interview Posner gave Fortune last year about how he manages to accomplish all that within the same 24-hour-day framework that the rest of us operate within, click here.(You'll need to scroll down or search for "posner" once you get there, since he's just one of many people interviewed there.)

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This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist. To join in the discussion or suggest topics, please email rparloff@fortunemail.com.